Here is a very interesting presentation by Tony Seba . He talks about technology disruption covering the adoption of disruptive technologies both historically (as far back as 1900 with the automobile) up through the future (energy and autonomous driving changes possible by 2030).
I recommend you watch the video (1 hour) as my comments below will make more sense with it as context. I am focused primarily on investing related extrapolation from this presentation.
Everything below is pure speculation on my part and for my own use in clarifying my thoughts of the moment. My thoughts are at times rambling (stream of consciousness as I consider the topic) and not well connected as I am extrapolating from the concepts presented in the video linked above. I may be wrong (or not) and I welcome any thoughts of your own, including criticism of my own conclusions.
I find the concept of disruptive technologies very relevant to our investing style. While I consider Mr. Seba’s predictions for the future arguable (I am always skeptical of prophets), the concept and timeline of disruptive technologies is a valid idea and worth considering in the context of growth stocks.
A few key concepts I identified useful for analyzing my investments:
• A 10x cost benefit indicates a disruption event is imminent.
• An entire industry may be created or disappear in 10 years or less.
• Disruption events are becoming more and happening more rapidly.
• A disruptive technology is adopted in an s-curve.
My first observation is that Amazon (AMZN) is a driving force in retail sales disruption. I remember Saul commenting on the empty stores in New York when he sold out of SBNY. I have seen the same empty storefronts in prime locations throughout Europe in locations where locals say a new store used to move in within weeks (or days) of an old store closing. Comments by these people are that it is a sign of a struggling economy but I now believe it is an indication of this transition to online retail sales. Amazon was a driving force behind this disruption and Shopify is one of the current beneficiaries of the fact that we are currently in the midst of this disruption event.
The difficulty for investing is in identifying which companies will be the key players in a disruptive event. Amazon is a clear player for the shift to online retail sales but Shopify could never have been predicted until it appeared and even now is often debated. The adoption of the Shopify platform is amazing and their revenue growth impressive but continued operations at a net loss are understandably worrisome even assuming the trend towards online sales continues. Other factors are even less clear as they are not yet in play. Amazon is experimenting with drone delivery, an idea which could spread rapidly as a part of this same transition to online retail sales. Who will provide the drones and the components for the drones? No clear answers at this stage. Drone delivery is also still so uncertain it may never become a reality or could be overtaken by a some other technology which ends up being more cost effective.
Looking further into the future, the obvious upcoming disruption events discussed in the video are energy and autonomous vehicles. What interests me most about these upcoming events is that we are so early in the cycle there are no companies clearly profiting from these events. Revolutions in electric cars, solar power, energy storage, artificial intelligence, autonomous driving and more all look promising yet even the best companies related to these technologies are often questionable investments. Just look at the controversy surrounding Tesla. Even Nvidia which has a more broad investment thesis is far from what I would call a sure bet.
Yet I see this same uncertainty and doubt as the most promising indicator I have that I am looking at interesting companies. Change is difficult for people to accept and rapid change can feel outright traumatic at times. If a change might lead to an entire industry collapsing (such as could be caused by autonomous driving systems) there will be significant resistance by consumers and widespread attempts by the dying industry to delay or prevent their own demise. I am thinking of autonomous driving systems here and the widespread doubt that people will accept Level 5 autonomy in the predicted timeframe (2025 I believe). Is this a real concern of people? Or is it resistance by numerous industries which would become obsolete with widespread acceptance of Level 5 autonomy? (To be clear, I don’t have an answer for that).
All that theory is fine and dandy, now lets get practical: How does this change my investment philosophy?
I will take a closer look at unprofitable companies involved in pushing the boundaries of innovation. To date I have ignored Tesla because my analysis has been that there is far more hope in the price than real value reflected by the finances. But what if that hopeful price is actually understated because we resist the idea of rapid change? To my knowledge, other companies are working on electronic cars and autonomous driving yet none are as focused on the idea as Tesla.
I will look around for boring industries which may benefit from upcoming disruptions. If Mr. Seba is correct, batteries are going to become far more important in upcoming years as energy storage becomes so cheap on-demand energy generation can no longer compete. Someone is going to profit from the entire world suddenly buying large quantities of batteries. There may be an investment opportunity here which is being overlooked.
A few companies at the periphery of disruptive events may suddenly become much better or much worse investments with little or no notice. SBNY and Saul’s argument for exiting his position comes to mind. In a more positive direction, could LGIH be a beneficiary by offering houses based on a new lifestyle permitted by the combination of autonomous driving systems and cost efficient solar energy generation+storage?
I will look closer for sudden shifts in profitability and also for sudden shifts in supply and demand. Oil has had some rapid fluctuations in over-supply, is this a precursor indication of a shift away from oil? A few communities around the world are suddenly a lot more interested in solar power (Australia and some islands as noted in the video above), another indication? Perhaps I should watch the automotive industry sales even if I don’t yet have a related investment?
The rate of technological change is steadily increasing. This can be seen in the video above in the chart which shows disruption events over the past 100+ years. I remember from the knowledge base that Saul has a tendency to look back two years to find profitable companies. I see this trend changing with investments such as Shopify and big data companies which have not even exists for two years as of his initial investment, much less shown rapid growth for that timeframe. I may need to react to increasing growth faster than historical trends indicate.
Of primary interest is a comment from my friend who recommended me the video: “The stone age didn’t end because we ran out of stones.” In this case, the fossil fuel age probably won’t end because we run out of fossil fuels, but rather because we have developed an alternative which is both better and (more importantly) cheaper. This cost inversion is what will drive all of the above changes, not the actual technologies themselves. That seems critical to keep in mind when looking at future investments.
The video above notes that disruptions are happening more frequently and over a shorter duration of time. However, it seems to me we must separate these into two types of disruptive events: those that evolve society (e.g. the smartphone) and those that fundamentally change society (e.g. the automobile near 1900 and upcoming Level 5 autonomous driving systems). I suspect that anything which fundamentally changes society will probably take 10-15 years to play out even if the technology could technically be in widespread use faster than this. (Though I would definitely watch to see if I am wrong in this guess)
Regardless of any of the above, the concept of disruptive events seems important to consider as this type of disruption is one of the primary drivers of a growth opportunity for a company. Better understanding of disruptive events at a macroeconomic scale will likely lead to better investment decisions at the level of individual companies.
End of my rambling thoughts and random musings.
I am curious what all of you think.
Criticisms welcome, I may be wrong.